The Complete Guide to Option Pricing Formulas
, by Haug, Espen Gaarder- ISBN: 9780071389976 | 0071389970
- Cover: Hardcover
- Copyright: 1/8/2007
Espen Gaarder Haug, has more than 15 years of experience in derivatives trading and research. He has worked as a proprietary option trader at J.P. Morgan Chase in New York, and as an option trader for the hedge funds Amaranth Advisors and Paloma Partners. Dr. Haug has published extensively in journals such as Quantitative Finance, International Journal of Theoretical and Applied Finance, and Wilmott Magazine. He is also a popular lecturer on option pricing, hedging, and risk management and an Adjunct Associate Professor at Norwegian University of Science and Technology.
Introduction | p. xvii |
Acknowledgments | p. xix |
What Is New in the Second Edition? | p. xxi |
Option Pricing Formulas Overview | p. xxiii |
Glossary of Notations | p. xxxv |
Black-Scholes-Merton | p. 1 |
Black-Scholes-Merton | p. 2 |
The Black-Scholes Option Pricing Formula | p. 2 |
Options on Stock Indexes | p. 4 |
Options on Futures | p. 4 |
Margined Options on Futures | p. 5 |
Currency Options | p. 6 |
The Generalized Black-Scholes-Merton Option Pricing Formula | p. 7 |
Parities and Symmetries | p. 9 |
Put-Call Parity for European Options | p. 9 |
At-the-Money Forward Value Symmetry | p. 10 |
Put-Call Symmetry | p. 10 |
Put-Call Supersymmetry | p. 11 |
Black-Scholes-Merton on Variance Form | p. 11 |
Before Black-Scholes-Merton | p. 12 |
The Bachelier Model | p. 12 |
The Sprenkle Model | p. 13 |
The Boness Model | p. 14 |
The Samuelson Model | p. 14 |
Appendix A: The Black-Scholes-Merton PDE | p. 15 |
Ito's Lemma | p. 15 |
Dynamic Hedging | p. 16 |
Black-Scholes-Merton Greeks | p. 21 |
Delta Greeks | p. 21 |
Delta | p. 21 |
Delta Mirror Strikes and Assets | p. 29 |
Strike from Delta | p. 30 |
Futures Delta from Spot Delta | p. 31 |
DdeltaDvol and DvegaDspot | p. 32 |
DvannaDvol | p. 34 |
DdeltaDtime, Charm | p. 35 |
Elasticity | p. 36 |
Gamma Greeks | p. 38 |
Gamma | p. 38 |
Maximal Gamma and the Illusions of Risk | p. 39 |
GammaP | p. 42 |
Gamma Symmetry | p. 45 |
DgammaDvol, Zomma | p. 45 |
DgammaDspot, Speed | p. 47 |
DgammaDtime, Color | p. 49 |
Vega Greeks | p. 50 |
Vega | p. 50 |
Vega Symmetry | p. 55 |
Vega-Gamma Relationship | p. 55 |
Vega from Delta | p. 56 |
VegaP | p. 56 |
Vega Leverage, Vega Elasticity | p. 57 |
DvegaDvol, Vomma | p. 57 |
DvommaDvol, Ultima | p. 60 |
DvegaDtime | p. 61 |
Variance Greeks | p. 62 |
Variance Vega | p. 62 |
DdeltaDvar | p. 63 |
Variance Vomma | p. 63 |
Variance Ultima | p. 63 |
Volatility-Time Greeks | p. 64 |
Theta Greeks | p. 64 |
Theta | p. 64 |
Theta Symmetry | p. 68 |
Rho Greeks | p. 68 |
Rho | p. 68 |
Phi/Rho-2 | p. 71 |
Carry Rho | p. 73 |
Probability Greeks | p. 75 |
In-the-Money Probability | p. 76 |
DzetaDvol | p. 79 |
DzetaDtime | p. 80 |
Risk-Neutral Probability Density | p. 80 |
From in-the-Money Probability to Density | p. 80 |
Probability of Ever Getting in-the-Money | p. 80 |
Greeks Aggregations | p. 81 |
Net Weighted Vega Exposure | p. 82 |
At-the-Money Forward Approximations | p. 84 |
Approximation of the Black-Scholes-Merton Formula | p. 84 |
Delta | p. 84 |
Gamma | p. 84 |
Vega | p. 84 |
Theta | p. 84 |
Rho | p. 85 |
Cost-of-Carry | p. 85 |
Numerical Greeks | p. 85 |
First-Order Greeks | p. 85 |
Second-Order Greeks | p. 86 |
Third-Order Greeks | p. 86 |
Mixed Greeks | p. 87 |
Third-Order Mixed Greeks | p. 87 |
Greeks from Closed-Form Approximations | p. 89 |
Appendix B: Taking Partial Derivatives | p. 90 |
Analytical Formulas for American Options | p. 97 |
The Barone-Adesi and Whaley Approximation | p. 97 |
The Bjerksund and Stensland (1993) Approximation | p. 101 |
The Bjerksund and Stensland (2002) Approximation | p. 104 |
Put-Call Transformation American Options | p. 109 |
American Perpetual Options | p. 109 |
Exotic Options-Single Asset | p. 111 |
Variable Purchase Options | p. 111 |
Executive Stock Options | p. 114 |
Moneyness Options | p. 114 |
Power Contracts and Power Options | p. 115 |
Power Contracts | p. 115 |
Standard Power Option | p. 116 |
Capped Power Option | p. 117 |
Powered Option | p. 118 |
Log Contracts | p. 119 |
Log(S) Contract | p. 120 |
Log Option | p. 121 |
Forward Start Options | p. 121 |
Fade-in Option | p. 122 |
Ratchet Options | p. 124 |
Reset Strike Options-Type 1 | p. 124 |
Reset Strike Options-Type 2 | p. 125 |
Time-Switch Options | p. 127 |
Chooser Options | p. 128 |
Simple Chooser Options | p. 128 |
Complex Chooser Options | p. 129 |
Options on Options | p. 132 |
Put-Call Parity Compound Options | p. 135 |
Compound Option Approximation | p. 136 |
Options with Extendible Maturities | p. 138 |
Options That Can Be Extended by the Holder | p. 138 |
Writer-Extendible Options | p. 140 |
Lookback Options | p. 141 |
Floating-Strike Lookback Options | p. 141 |
Fixed-Strike Lookback Options | p. 143 |
Partial-Time Floating-Strike Lookback Options | p. 144 |
Partial-Time Fixed-Strike Lookback Options | p. 147 |
Extreme-Spread Options | p. 148 |
Mirror Options | p. 150 |
Barrier Options | p. 152 |
Standard Barrier Options | p. 152 |
Standard American Barrier Options | p. 154 |
Double-Barrier Options | p. 156 |
Partial-Time Single-Asset Barrier Options | p. 160 |
Look-Barrier Options | p. 163 |
Discrete-Barrier Options | p. 164 |
Soft-Barrier Options | p. 165 |
Use of Put-Call Symmetry for Barrier Options | p. 167 |
Barrier Option Symmetries | p. 168 |
First-Then-Barrier Options | p. 169 |
Double-Barrier Option Using Barrier Symmetry | p. 171 |
Dual Double-Barrier Options | p. 172 |
Binary Options | p. 174 |
Gap Options | p. 174 |
Cash-or-Nothing Options | p. 174 |
Asset-or-Nothing Options | p. 175 |
Supershare Options | p. 176 |
Binary Barrier Options | p. 176 |
Double-Barrier Binary Options | p. 180 |
Double-Barrier Binary Asymmetrical | p. 181 |
Asian Options | p. 182 |
Geometric Average-Rate Options | p. 182 |
Arithmetic Average-Rate Options | p. 186 |
Discrete Arithmetic Average-Rate Options | p. 192 |
Equivalence of Floating-Strike and Fixed-Strike Asian Options | p. 199 |
Asian Options with Volatility Term-Structure | p. 199 |
Exotic Options on Two Assets | p. 203 |
Relative Outperformance Options | p. 203 |
Product Options | p. 205 |
Two-Asset Correlation Options | p. 205 |
Exchange-One-Asset-for-Another Options | p. 206 |
American Exchange-One-Asset-for-Another Option | p. 208 |
Exchange Options on Exchange Options | p. 209 |
Options on the Maximum or the Minimum of Two Risky Assets | p. 211 |
Spread-Option Approximation | p. 213 |
Two-Asset Barrier Options | p. 215 |
Partial-Time Two-Asset Barrier Options | p. 217 |
Margrabe Barrier Options | p. 219 |
Discrete-Barrier Options | p. 221 |
Two-Asset Cash-or-Nothing Options | p. 221 |
Best or Worst Cash-or-Nothing Options | p. 223 |
Options on the Minimum or Maximum of Two Averages | p. 224 |
Currency-Translated Options | p. 226 |
Foreign Equity Options Struck in Domestic Currency | p. 226 |
Fixed Exchange Rate Foreign Equity Options | p. 228 |
Equity Linked Foreign Exchange Options | p. 230 |
Takeover Foreign Exchange Options | p. 232 |
Greeks for Two-Asset Options | p. 232 |
Black-Scholes-Merton Adjustments and Alternatives | p. 233 |
The Black-Scholes-Merton Model with Delayed Settlement | p. 234 |
The Black-Scholes-Merton Model Adjusted for Trading Day Volatility | p. 235 |
Discrete Hedging | p. 236 |
Hedging Error | p. 236 |
Discrete-Time Option Valuation and Delta Hedging | p. 237 |
Discrete-Time Hedging with Transaction Cost | p. 238 |
Option Pricing in Trending Markets | p. 240 |
Alternative Stochastic Processes | p. 242 |
Constant Elasticity of Variance | p. 242 |
Skewness-Kurtosis Models | p. 244 |
Definition of Skewness and Kurtosis | p. 244 |
The Skewness and Kurtosis for a Lognormal Distribution | p. 245 |
Jarrow and Rudd Skewness and Kurtosis Model | p. 246 |
The Corrado and Su Skewness and Kurtosis Model | p. 247 |
Modified Corrado-Su Skewness-Kurtosis Model | p. 250 |
Skewness-Kurtosis Put-Call Supersymmetry | p. 252 |
Skewness-Kurtosis Equivalent Black-Scholes-Merton Volatility | p. 252 |
Gram Charlier Density | p. 252 |
Skewness-Kurtosis Trees | p. 253 |
Pascal Distribution and Option Pricing | p. 253 |
Jump-Diffusion Models | p. 253 |
The Merton Jump-Diffusion Model | p. 253 |
Bates Generalized Jump-Diffusion Model | p. 255 |
Stochastic Volatility Models | p. 258 |
Hull-White Uncorrelated Stochastic Volatility Model | p. 259 |
Hull-White Correlated Stochastic Volatility Model | p. 261 |
The SABR Model | p. 265 |
Variance and Volatility Swaps | p. 271 |
Variance Swaps | p. 271 |
Volatility Swaps | p. 274 |
More Information | p. 278 |
Trees and Finite Difference Methods | p. 279 |
Binomial Option Pricing | p. 279 |
Cox-Ross-Rubinstein American Binomial Tree | p. 284 |
Greeks in CRR Binomial Tree | p. 287 |
Rendleman Bartter Binomial Tree | p. 289 |
Leisen-Reimer Binomial Tree | p. 290 |
Convertible Bonds in Binomial Trees | p. 292 |
Binomial Model with Skewness and Kurtosis | p. 297 |
Trinomial Trees | p. 299 |
Exotic Options in Tree Models | p. 303 |
Options on Options | p. 303 |
Barrier Options Using Brownian Bridge Probabilities | p. 305 |
American Barrier Options in CRR Binomial Tree | p. 307 |
European Reset Options Binomial | p. 308 |
American Asian Options in a Tree | p. 314 |
Three-Dimensional Binomial Trees | p. 315 |
Implied Tree Models | p. 321 |
Implied Binomial Trees | p. 321 |
Implied Trinomial Trees | p. 327 |
Finite Difference Methods | p. 334 |
Explicit Finite Difference | p. 335 |
Implicit Finite Difference | p. 338 |
Finite Difference in ln(S) | p. 340 |
The Crank-Nicolson Method | p. 342 |
Monte Carlo Simulation | p. 345 |
Standard Monte Carlo Simulation | p. 345 |
Greeks in Monte Carlo | p. 347 |
Monte Carlo for Callable Options | p. 349 |
Two Assets | p. 350 |
Three Assets | p. 352 |
N Assets, Cholesky Decomposition | p. 353 |
Monte Carlo of Mean Reversion | p. 355 |
Generating Pseudo-Random Numbers | p. 356 |
Variance Reduction Techniques | p. 358 |
Antithetic Variance Reduction | p. 358 |
IQ-MC/Importance Sampling | p. 359 |
IQ-MC Two Correlated Assets | p. 361 |
Quasi-Random Monte Carlo | p. 362 |
American Option Monte Carlo | p. 364 |
Options on Stocks That Pay Discrete Dividends | p. 367 |
European Options on Stock with Discrete Cash Dividend | p. 368 |
The Escrowed Dividend Model | p. 368 |
Simple Volatility Adjustment | p. 369 |
Haug-Haug Volatility Adjustment | p. 369 |
Bos-Gairat-Shepeleva Volatility Adjustment | p. 370 |
Bos-Vandermark | p. 371 |
Non-Recombining Tree | p. 372 |
Black's Method for Calls on Stocks with Known Dividends | p. 375 |
The Roll, Geske, and Whaley Model | p. 375 |
Benchmark Model for Discrete Cash Dividend | p. 378 |
A Single Dividend | p. 378 |
Multiple Dividends | p. 382 |
Applications | p. 382 |
Options on Stocks with Discrete Dividend Yield | p. 390 |
European with Discrete Dividend Yield | p. 390 |
Closed-Form American Call | p. 390 |
Recombining Tree Model | p. 393 |
Commodity and Energy Options | p. 397 |
Energy Swaps/Forwards | p. 397 |
Energy Options | p. 400 |
Options on Forwards, Black-76F | p. 400 |
Energy Swaptions | p. 401 |
Hybrid Payoff Energy Swaptions | p. 405 |
The Miltersen-Schwartz Model | p. 406 |
Mean Reversion Model | p. 410 |
Seasonality | p. 411 |
Interest Rate Derivatives | p. 413 |
FRAs and Money Market Instruments | p. 413 |
FRAs From Cash Deposits | p. 413 |
The Relationship between FRAs and Currency Forwards | p. 414 |
Convexity Adjustment Money Market Futures | p. 415 |
Simple Bond Mathematics | p. 417 |
Dirty and Clean Bond Price | p. 417 |
Current Yield | p. 417 |
Modified Duration and BPV | p. 417 |
Bond Price and Yield Relationship | p. 418 |
Price and Yield Relationship for a Bond | p. 418 |
From Bond Price to Yield | p. 419 |
Pricing Interest Rate Options Using Black-76 | p. 419 |
Options on Money Market Futures | p. 420 |
Price and Yield Volatility in Money Market Futures | p. 421 |
Caps and Floors | p. 421 |
Swaptions | p. 422 |
Swaption Volatilities from Caps or FRA Volatilities | p. 424 |
Swaptions with Stochastic Volatility | p. 425 |
Convexity Adjustments | p. 425 |
European Short-Term Bond Options | p. 427 |
From Price to Yield Volatility in Bonds | p. 428 |
The Schaefer and Schwartz Model | p. 428 |
One-Factor Term Structure Models | p. 429 |
The Rendleman and Bartter Model | p. 429 |
The Vasicek Model | p. 430 |
The Ho and Lee Model | p. 432 |
The Hull and White Model | p. 433 |
The Black-Derman-Toy Model | p. 434 |
Volatility and Correlation | p. 445 |
Historical Volatility | p. 445 |
Historical Volatility from Close Prices | p. 445 |
High-Low Volatility | p. 447 |
High-Low-Close Volatility | p. 448 |
Exponential Weighted Historical Volatility | p. 449 |
From Annual Volatility to Daily Volatility | p. 450 |
Confidence Intervals for the Volatility Estimate | p. 451 |
Volatility Cones | p. 452 |
Implied Volatility | p. 453 |
The Newton-Raphson Method | p. 453 |
The Bisection Method | p. 455 |
Implied Volatility Approximations | p. 456 |
Implied Forward Volatility | p. 458 |
From Implied Volatility Surface to Local Volatility Surface | p. 458 |
Confidence Interval for the Asset Price | p. 459 |
Basket Volatility | p. 460 |
Historical Correlation | p. 460 |
Distribution of Historical Correlation Coefficient | p. 461 |
Implied Correlations | p. 462 |
Implied Correlation from Currency Options | p. 462 |
Average Implied Index Correlation | p. 462 |
Various Formulas | p. 463 |
Probability of High or Low, the Arctangent Rule | p. 463 |
Siegel's Paradox and Volatility Ratio Effect | p. 464 |
Distributions | p. 465 |
The Cumulative Normal Distribution Function | p. 465 |
The Hart Algorithm | p. 465 |
Polynomial Approximations | p. 467 |
The Inverse Cumulative Normal Distribution Function | p. 469 |
The Bivariate Normal Density Function | p. 470 |
The Cumulative Bivariate Normal Distribution Function | p. 470 |
The Trivariate Cumulative Normal Distribution Function | p. 482 |
Some Useful Formulas | p. 487 |
Interpolation | p. 487 |
Linear Interpolation | p. 487 |
Log-Linear Interpolation | p. 487 |
Exponential Interpolation | p. 487 |
Cubic Interpolation: Lagrange's Formula | p. 488 |
Cubic-Spline Interpolation | p. 488 |
Two-Dimensional Interpolation | p. 490 |
Interest Rates | p. 491 |
Future Value of Annuity | p. 491 |
Net Present Value of Annuity | p. 491 |
Continuous Compounding | p. 491 |
Compounding Frequency | p. 491 |
Zero-Coupon Rates from Par Bonds/Par Swaps | p. 492 |
Risk-Reward Measures | p. 493 |
Treynor's Measure | p. 493 |
Sharpe Ratio | p. 494 |
Confidence Ratio | p. 494 |
Sortino Ratio | p. 495 |
Burke Ratio | p. 495 |
Return on VaR | p. 495 |
Jensen's Measure | p. 496 |
Appendix C: Basic Useful Information | p. 496 |
The Option Pricing Software | p. 497 |
Bibliography | p. 499 |
Index | p. 521 |
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